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Coking coal becomes the flavor of the month

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It was only a few months ago that Donald R. Lindsay, chief executive officer of Teck Cominco Ltd., was lamenting the lack of opportunities in one segment of the steelmaking raw materials market. Teck would love to get into the iron ore business, he said in February, but the problem was there were no good properties available.

That analysis stills holds true today. The large majority of the traded iron ore market remains under the control of the three big producers Brazil's Vale and Anglo-Australian mining houses Rio Tinto and BHP Billiton. Enticed by a surging spot market and the prospect of big increases in contract prices, new entrants are rushing to bring ore to market, but a sale isn't on anyone's agenda.

In late July, Teck unveiled its solution to this dilemma Forget iron ore, go for coal instead. With its $13.8-billion bid for Fording Canadian Coal Trust (AMM, July 30), North America's biggest metallurgical coal exporter, Teck will become a major player in this market. When taken together with its presence in base and precious metals and its ownership of Canadian oil sands projects, it is looking to be one of the most diversified mining companies around.

Teck isn't the only North American company turned on to the value of coking coal. Cleveland-Cliffs Inc. bid $10 billion for Alpha Natural Resources Inc. in July (AMM, July 16), while ArcelorMittal SA has been snapping up smaller producers throughout the summer. Further afield, ArcelorMittal is also battling it out with South Korean steelmaker Posco Ltd. and a Chinese investment firm for control of Australia's Macarthur Coal Ltd.

So why metallurgical coal, and why now? Partly it's due to sheer necessity Coal assets are available, for a price, while taking control of iron ore assets is an altogether more complex proposition, as BHP Billiton is discovering as its massive bid for Rio Tinto runs into regulatory problems in Europe.

But coking coal producers are an attractive target in their own right. In iron ore, the jury is out on whether the market will remain tight or whether the new projects that are coming online this year and next, together with a slight but appreciable slowdown in the pace of Chinese steel output, will finally cap the price gains of the last five years.

Metallurgical coal looks to be a more bullish prospect. While it might be true that a slowdown in Asian blast furnace production would hit demand for coking coal as much as it would for iron ore, the metallurgical coal market has received little of the attention—or investment dollars—that iron ore has since the Chinese boom began. To some extent, the market is now playing catch up Strong demand from China's mills and a transportation crunch in Australia have combined to send prices surging, with contract prices between Australian producers and Japanese steelmakers more than tripling earlier this year. North American producers are benefiting too Alpha's net income soared to $74.3 million in the second quarter, more than 15 times the year-earlier $4.7 million (AMM, July 30).

Those kind of numbers are guaranteed to attract attention. Rumors emerged in late July that ArcelorMittal might be mulling a counterbid for Alpha, or even for Cleveland-Cliffs itself. Meanwhile, Cliffs' largest shareholder, privately owned hedge fund Harbinger Capital Partners, greeted the news of the Alpha bid by pressing for Cliffs to put itself up for sale instead.

So Lindsay's lament about the lack of iron ore opportunities looks unlikely to be echoed in coking coal anytime soon. New opportunities are emerging, but only those with big wallets—and the stomach for a fight—need apply.

DAVID BROOKS, SENIOR VICE PRESIDENT

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